Understanding the Numbers
It’s that time of year again … the Red Door Market Reports are hot off the press! The following is our interpretation of the numbers.
Looking back on 2014…
The residential real estate market continued to be incredibly tight throughout 2014 with inventory declining year-over-year by almost 50%. Once again, there simply weren’t enough homes on the market to satisfy buyer demand. Interest rates remained low throughout the year, but lenders’ warnings about pending increases added fuel to the buyer fire. Rate increases never materialized (rates are currently lower than this time last year!), however, once again, experts expect rates to increase. Time will tell. Sellers continued to enjoy multiple offer situations throughout the year (if their sale was executed properly) while buyers struggled against relentless competition.
The continued high demand and low inventory situation in 2014 caused prices to increase again year-over-year. The double-digit price increases that we saw across all neighborhoods in 2013 continued in the more transitional/high-development neighborhoods in 2014, but growth rates in the more established neighborhoods tempered a bit. This “slow down” (if you can even call it that) in the established neighborhoods reflects a declining buyer pool for the price points these neighborhoods now command…While established neighborhoods are still very desirable, many buyers simply can’t afford what they want there and must expand their search to the more transitional neighborhoods. As you review the attached summary, note the presence of $1MM sales now occurring in the majority of our neighborhoods. Development is continuing at a feverish pace in all neighborhoods as builders scrape existing structures and build new homes to meet buyer demand. We are seeing new-builds come on line…and they are being gobbled up!
Looking forward into 2015…
It is very early in the year, but the market continues to be extremely tight with no signs of inventory expansion yet. We expect this to change for both seasonal reasons (i.e., we are rapidly approaching Denver’s prime selling season) and because prices have increased to the point where many sellers are ready to come off the sidelines. The most challenging segment of the market is the “move-up buyer”. This buyer has a home to sell, and wants to roll their current equity into the purchase of a more expensive home. We are seeing a bit of grid-lock in the market because of this difficult to coordinate sell-then-buy scenario. Over a third of our sellers last year fell into this category, and I’m happy to report none of them are currently homeless! Completing this transaction takes experience, skill, solid negotiation skills…and a lot of trust. Contingent offers are very difficult to negotiate, so the best strategy is to create high demand on the sale-side to generate the leverage necessary to negotiate a lease-back for our sellers giving them precious time to find the right replacement home. In 2014, with the exception of one, contingent offer that was not successful, 100% of our offers above the $400,000 price threshold were accepted. One hundred percent! If you are talking with people around the water cooler, that is a pretty darn amazing record. Many buyers are writing 10+ offers on homes without success. Below $400,000, we had three buyers that had to write between two and four offers before we were successfully under contract.
For buyers, this can be a very dangerous market if you’re over-anxious and have poor representation. Our buyers hear us advise again and again, “you can do better!” But, patience is what is required of buyers to be successful in this market. The right home will come along, but, when that right home comes along, you don’t want to be unloading your moving truck in front of the wrong home! And, you don’t want to be trying to sell that wrong home down the road in a different market when sellers have less power. Patience, buyers…patience…patience…patience! We would rather see our buyers continue to rent than make a poor investment decision. It is very difficult and costly to get out of a poor real estate decision.
And, sellers, this market isn’t a slam-dunk even if you have a great house…getting top-dollar for your home still requires proper positioning, strategic pricing, auction-style execution and a lot of upfront buyer due-diligence to ensure the highest price for your home and a successful closing. Failed contracts are a dime a dozen in this market where many buyers simply seek to lock sellers up contractually and then decide later whether they truly like the house! And, a failed contract can stigmatize a property, potentially costing a seller thousands of dollars. Sellers who sell their homes off-market in this market are leaving dollars on the table. To get a market price for your home, you must take it to the market…it’s that simple! The laws of economics are clear…low supply and high demand will yield the highest price. We’ve clearly got low supply (that’s obvious!), but selling your home off-market fails to leverage the high demand portion of the equation…accepting an off-market offer may be easy and you may think you’re getting a great price, but are you? You’ll never know how much money you’ve left on the table unless you strategically open your door and allow the buyer frenzy to bid your price up to top dollar!
Final thoughts on the market…
We are often asked if we think this is another bubble…so, we thought it would be a good idea to address this topic directly. We believe Denver is uniquely positioned to thrive and this market stands in stark contrast to the market of 2006. In 2006, many people were buying homes that had no business buying homes and lenders were handing out loans with crazy terms to unqualified borrowers. What’s different today? People who are buying homes are financially qualified. An increasing number of transactions are “all cash” and banks are much more strict with underwriting policies. Although there are still loans available with only 3%-5% down, borrowers must be immensely qualified for those high LTV options and to get the best rates many borrowers are choosing to put a healthier amount down on their purchase. And, while those of us who live in Denver think our prices have gotten crazy, folks moving here from the coasts tend to disagree…prices have a long way to go before they start to look high relative to prices in other major cities. That said, real estate prices are obviously linked to the overall US economy and no one can say for sure what the economy will do, but we feel very confident that the fundamentals of our current price appreciation are very different from those of the 2006 bubble. In our opinion, now is a great time to buy a home in Denver if one remains patient and purchases a solid home with a long-term investment strategy. We will, of course, have ebbs and flows, but long-term, we’re all lucky to call Denver home! Millennials are the next big demographic to have a significant impact on the housing sector….and, not sure if you’ve heard the news, but Millennials love Denver and are moving here in droves! Who doesn’t love Denver, right? In order to continue to attract this generation, however, we need to provide affordable, urban housing options for them when they arrive. Our city’s development has been hampered by the construction defect law. This is why you see so many apartments going up, versus for-sale condo projects (i.e., rentable options versus buyable options). Senate Bill 177 was put forward this week to address this issue. We need a law that strikes a balance…one that protects consumers but also promotes sensible development so that we are able to provide the housing options that our newest and youngest residents demand.
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